A non-competition clause is one of the tools to protect an employer from potential leak of information to its competitors through its (then former) employees and could be an effective tool to protect the employer’s business know-how if negotiated correctly and sensitively.
Although the legal regulation of the non-competition clause contained in the provisions of Sections 310 and 311 of Act No. 262/2006 Coll., the Labour Code, as amended (hereinafter the “Labour Code“), appears to be undisputed and complete, it did not escape the scrutiny of the Constitutional Court.
Non-competition clause in general
By entering into a non-competition clause agreement, the employee undertakes to refrain for a certain period of time after the end of employment from engaging in any profitable activity that would be identical to or competitive with the employer’s business. In return for such a restriction, the employer shall provide the employee with a reasonable financial compensation of at least one-half of the employee’s average monthly earnings for each month of performance of the obligation, which is an essential element of such an agreement, under penalty of its invalidity.
A non-competition clause must be in writing, can last for a maximum of one year and can only be concluded if the employee can be fairly required to conclude such a clause. It is therefore necessary to examine whether the employee possesses the kind of information, the use of which by a competitor could seriously harm the employer’s business.
If an employee breaches his or her obligation under the non-competition clause, he or she may be required to pay a contractual penalty if one was agreed in the non-compete agreement. In such a case, the employee’s obligation under the non-competition clause shall be extinguished by payment of the contractual penalty.
A non-competition clause can be negotiated both before and during the employment relationship, either as part of the employment contract, an amendment to it or it can be negotiated in a separate agreement.
The obligations under the non-competition clause constitute a tangible interference with the employee’s constitutionally protected human right to freedom of employment[1], which extends exclusively to the post-employment period and for which the employee must be compensated. In this context, and for the sake of clarity, we note that, under the provisions of Section 304 of the Labour Code, the employee is also restricted in this right during the period of employment, when the employee may not, without the written consent of his employer, generally engage in gainful employment which is identical to the employer’s business.
Termination of the non-competition clause
If the employer breaches its obligation to pay the employee the agreed reasonable monetary compensation within 15 days after it is due, the employee has the right to terminate the non-competition clause. In this case, the non-competition clause shall be terminated on the first day of the calendar month following the date of delivery of the notice to the employer.
Withdrawal from the non-competition clause
Both the employee and the employer may withdraw from the non-competition clause. The provisions of Sections 2001 et seq. of Act No. 89/2012 Coll., the Civil Code, as amended (hereinafter the “Civil Code“) shall apply to such withdrawal in the alternative, however, considering the special regulation contained in Section 310 (4) of the Labour Code.
While the Labour Code does not further specify the conditions of such withdrawal from the non‑competition clause by the employee, it allows the employer to withdraw only for the duration of the employee’s employment.
As regards the possibility of withdrawing from the non-competition clause for any reason (i.e., without stating one), it has been consistently held that such withdrawal is not possible, especially since such an interpretation lacked a legal basis. Moreover, it may be considered that an employer who could withdraw from the non-competition clause for any reason could do so even on the last day of the employment relationship. Viewed through the lens of the employee, an employee who believes that he or she is bound by the agreed non-competition clause would take such a fact into account in his or her job interviews and would not have time to react in time to a possible withdrawal from the non-competition clause on the last day of his employment.
In the judgment of 5 November 2020, Case No. 21 Cdo 4779/2018, the Supreme Court made clear that it is not possible for the parties to negotiate such a withdrawal for any reason in the agreement on the non-competition clause, considering the special protection of the employee under employment law.
The Constitutional Court and the creative shaping of law
The possibility of an employer to withdraw from the non-competition clause for any reason was dealt with by the Constitutional Court in its decision of 21 May 2021, Case No. II ÚS 1889/19 (hereinafter the “Decision“).
In the present case, the employer and the employee concluded an agreement on a non-competition clause, based on which the employee undertook to refrain from engaging in any gainful activity that would be identical to the employer’s business or that would be of a competitive nature with respect to the employer. However, the employee decided to terminate the employment relationship after two years, with the understanding that it should have ended on 30 April 2016. But one week before the termination of the employment relationship, the employer decided to withdraw from the non-competition clause, under which it was obliged to pay the employee a monetary benefit of half of the employee’s average monthly earnings (approximately CZK 210,000) for each month of the employee’s limitation.
In view of the above, the employee decided to pursue his monetary claim in court, considering the withdrawal from the agreement on the non-competition clause to be null and void, in accordance with the previous decision-making practice of the general courts. Not only the court of first instance, but also the Court of Appeal and even the court of last instance, the Supreme Court, ruled in favour of the employee, for the reasons we have set out above. However, the employer brought a constitutional complaint against the decisions in question, which he was successful in pursuing.
In its Decision, the Constitutional Court sided with the employer, stating that “a general prohibition (shaped by judicial decisions) of contractual arrangements entitling the employer to withdraw from a non-competition clause without stating a reason (or “for any reason”) is not permissible. Any abuse or arbitrariness of the employer’s right to withdraw from a non-competition clause even without giving a reason (or ‘for any reason’), if such a possibility has been agreed, must be established and proved in the context of the judicial proceedings in the light of the specific facts of the case, and not automatically and without further presumption; all the relevant circumstances of the case must be taken into account when deciding the question.”
The Constitutional Court emphasized that the agreement on the non-competition clause is a bilateral legal transaction, which gives rise to rights and obligations for both the employee and the employer. It is clear that the institute of the non-competition clause serves primarily the needs and protection of the employer.
Nevertheless, a situation may arise where the employer has no further interest in the continuation of the non-competition clause, for example due to the obsolescence of the information that the non-competition clause was intended to prevent, or the loss of the lucrativeness of that information, or because the employee has simply not encountered any such information.
The Constitutional Court did not avoid the argument that if the employer’s withdrawal from the non‑competition clause is admissible for any reason whatsoever (i.e., without stating it), an absurd situation may arise where the employer withdraws from the agreement on the non-competition clause the day before the employee’s employment ends. In this regard, the Constitutional Court states in its Decision that it is aware that “the non-competition clause may have a de facto effect on the negotiations of the parties and may have a de facto impact on the employee’s decision on his or her future career even before the end of the employment relationship“.
Therefore, in the opinion of the Constitutional Court, the employer’s unrestricted ability to withdraw from the non-competition clause even on the last day of the employee’s employment cannot be accepted, on the grounds that the employer’s freedom ends where it interferes with the fundamental rights and legitimate interests of the employee, who, in addition, is granted special protection by the constitutional order in employment relations.
However, arbitrariness or abuse of the employer’s right to withdraw from the non-competition clause without giving a reason, if this option was agreed by the parties, must be investigated, and proven in the court proceedings in the light of the specific facts of the case, not automatically and without further presumption.
Such circumstances, according to the Constitutional Court, will be in particular:
- the time when the employer’s resignation occurred;
- if the employer withdrew from the non-competition clause just before the employee’s employment ended, the reason why it could not do it earlier (the employer should be able to explain this at least in the proceedings before the court);
- if the employer withdrew from the non-competition clause without giving a reason, the reason why the employer considered the binding of the parties to the non-competition clause to be undesirable, unreasonable, untenable or unfair (the employer should be able to explain this at least in court proceedings);
- facts indicating that the employee has chosen his or her future employment or other career because of his or her commitment to the non-competition clause (e.g., he or she has already found a job that meets the requirements of the non-competition clause or, on the contrary, has refused an offer of a job that did not meet those requirements); or
- facts indicating that the employer acted arbitrarily or abused its right to withdraw from the non-competition clause (e.g., it sought to relieve itself of the obligation to provide monetary compensation to the employee at a time when it knew or could and should have known that the employee had chosen his or her future employment or other career because of his or her commitment to the non-competition clause).
Summary
The Constitutional Court has broken the previous decision-making practice of the general courts regarding the impossibility of an employer to withdraw from an agreement on the non-competition clause without giving a reason (or any reason). The decision of the Constitutional Court, which now allows the employer to validly stipulate in the agreement on the non-competition clause the possibility of the employer to withdraw from the non-competition clause, must be evaluated positively, because it considers not only the interests of the employee, but also the interests of the employer, for whose protection the institute of the non-competition clause serves.
The Constitutional Court sided with the employers when it recalled that the non-competition clause agreement is a bilateral legal negotiation in which it is up to the employee and the employer to agree on its content, it is subject to mandatory legal provisions, and when it condemned the inadmissible shaping of the law by the general courts with regard to the blanket impossibility for the employer to withdraw from the non-competition clause without giving a reason (or for any reason), even if this possibility was agreed in the non-competition agreement.
Conclusion
The non-competition clause, if negotiated properly and sensitively, can be an effective tool to protect an employer’s business know-how and it is certainly worth remembering and considering its use.
If you have any questions about the topic of non-competition clauses or the general organization of the relations with employees, we are at your disposal.
Mgr. Tomáš Maux, junior lawyer – maux@plegal.cz
Mgr. Jakub Málek, partner – malek@plegal.cz
https://www.peytonlegal.cz/en/
30. 08. 2021
[1] Everyone has the right to freely choose a profession and prepare for it, as well as the right to engage in business and other economic activities(Resolution No. 2/1993 Coll., of the Presidium of the Czech National Council on the promulgation of the Charter of Fundamental Rights and Freedoms as part of the constitutional order of the Czech Republic, Article 26).